We have shown previously that blind spots in your sales process can be costing you thousands, if not millions. But what happens when a company overlooks pricing?
When in business it’s imperative to maximize profits to stay ahead and afloat. Product, place and promotion afects costs but price is the only element that affects revenues and thus a business's profits. A smart pricing policy will have a massive impact on your bottom line - a one percent increase in price (for most companies) for instance often results in a 10% or greater increase in profits.
Yet why do so many companies fail to give the topic the attention it deserves?
It might be because of the following:
1. They often (wrongly) believe there is not much flexibility in price decision making; either they assume a need to match competitive pricing or mark-up a fixed percentage from the cost of goods to meet gross profit goals. Many companies have a built-in lethargy and resistance to innovative pricing thinking, as well as a lack of awareness as to what pricing tools and techniques are out there for measurability and smart decision-making.
2. Companies with a strong sales-driven culture often place paramount importance on revenue and unit volume to the detriment of profitability. Typically, sales quotas are based on revenue and volume, not profitability. In the absence of a smart strategic pricing dialogue, sales people often aggressively push through their point of view to the detriment of alternative thinking.
3. Consumer marketers often affect B2B pricing decisions. Problems occur if the marketer fails to set a price that complements the other elements of the marketing mix and the business objectives, as pricing contributes to how customers perceive a product or a service. A high price indicates high quality. Consumers on the other hand know what to expect when they see low prices. Generally, high turnover cheaper products are more sensitive to pricing swings. However, the pricing experience to higher priced products or service businesses often does not translate well. Adjusting the price has a profound impact on the marketing strategy, and depending on the price elasticity of the product, it will often affect the demand and sales as well. Both a price that is too high and one that is too low can limit growth. The wrong price can also negatively influence sales and cash flow. Business's ignore this issue at their peril!
4. Often businesses do not have a dedicated professional pricing strategist. The pricing "pie" can often be one that many people have a finger in but these representatives of different departments will all have their own agendas and strategies.
How to create the optimal pricing environment in B2B companies?
1. Automate. It takes too long and is too expensive to do the necessary analysis on thousands of products manually. You need to develop automated pricing systems that analyze customer data to identify narrow segments, determine what drives value for each one, and match that with historical transactional data. These factors will allow you to identify and set prices for targeted “clusters” of products and segments based on facts. Automation also allows you to replicate your system over time and make adjustments so you’re not starting from scratch every time.
2. Implement and track. Implementing new prices is both a communications and an operational challenge. The value drivers that many companies express are often different from what customers actually perceive. You need to clearly understand what drives value then communicate that, along with the new target prices, to your sales force. You’ll also need to adjust existing pricing policies and performance measurements, and create new incentives.
3. "Listen" to what your data is saying. B2B companies have for too long merely administered their data rather than used it to drive decisions. Good analytics should move beyond the basics and help companies identify how factors that are often missed – like the economic situation, product preferences, sales negotiations, etc. – reveal what drives prices for each customer segment.
4. Good leadership. Create a senior position dedicated to pricing strategy. This person will be armed with the latest information on pricing tools and strategies and be able to counteract the disadvantages mentioned above. They should attend pricing industry conferences regularly — to share experiences with other dedicated pricing professionals and become familiarised with the diagnostic tools that can monitor the impact of pricing in real time. He or she will also learn how to segregate different market segments for optimal pricing and profitability. Most importantly they will learn the interpersonal skills required to change a stubborn corporate culture with regard to pricing, without ruffling too many feathers.
Some companies have more flexibility than others, but everyone wants to get the maximum value for their products. There are plenty of case studies and whitepapers on the subject, which clearly indicates that Pricing is too important a subject to be ignored.
A healthy respect for the benefits of an optimal pricing strategy has to be engendered and a curiosity for the latest pricing tools. Culture change is not always easy but more attention paid to Pricing can translate into bigger profits - without the cost or risks associated with adding new products or breaking into new markets.